BusinessDay contributing editor

The RBA has started to put a finger on the smoke-and-mirrors game the banks play with their standard variable mortgage rates. Photo: AFP

First the good news for the mortgage-burdened: our major banks have cut interest rates by more than they publicly admit. In fact, they've cut by more than the Reserve Bank's last cash rate reduction and there's enough in the RBA's latest monetary policy statement to suggest there's another cash rate trimming in the offing.

The bad news is that there's not much more trimming in the offing, with the usual caveat that Europe doesn't implode or the Tea Party migrates to China. As is the nature of bad news, that was immediately reported upon the release of the statement on Friday while the rest of the economic treasure trove remained unexplored.

For example, the RBA has started to put a finger on the smoke-and-mirrors game the banks play with their “official” mortgage rates – the standard variable loan rate that attracts all the headlines and political opprobrium. It's been my suspicion for some time that this standard rate matters less and less as an indicator of what banks are actually charging.

While the banks have been copping flak for not passing on more of the RBA cash rate reductions, they've actually been passing on more than the last 25-point official movement – an indication that there is indeed competition in the home loan market.

Tucked away on page 50 of the RBA's 72-page document is a chart on intermediaries' lending rates. It shows that the average of the banks' “standard variable rates” fell by 19 points to 6.64 per cent between the end of July and November 8, taking in October's 25-point cash rate cut.

But the chart also shows that the average “package rate” fell by 29 points in the same period to 5.85 per cent – by 4 points more than the RBA's move. Yep, it's a matter of following what the banks do, rather than what they say.

The RBA defines the package rate as “the major banks' discounted package rates on $250,000 full-doc loans” – so it's not for everyone but it should be for most and is a better indication of the extent of discounts the lenders are prepared to make off their headline rate in the current market.

(The same chart shows personal loans were only trimmed by 7 points to 12.91 per cent since July and are only down by 36 points over the past 13 months despite the cash rate being cut by 150 points. Loans to large businesses have been cut by 156 points since October 2011 to 5.46 per cent.)

On the same page as the chart is a graph showing that the average interest rate on outstanding housing loans remains a bit over 6 per cent. Part of the reason for that higher level will be the inclusion of loans that don't meet discount package standards – low-doc, for example.

But another part will be because of inertia among people with existing mortgages – borrowers who took out loans a year or more ago and who haven't kept an eye on the competition in the market. They will have read the headlines about their bank's indicator lending rate movement, but not known that their bank is actually giving new customers – and those who haggle – better rates.

Which I guess is why the banks are happy to wear the flak for their headline rates not passing on the latest cash-rate movement in full – they can look like good guys doing deals with new customers while making more out of existing customers who don't know how to negotiate with their bank and/or take their business elsewhere.

What's more, that average package rate of 5.85 per cent can itself by up for negotiation downwards for good customers with larger loans. Just don't expect your bank to tell you if you don't ask.

There are plenty of other nuggets in the RBA statement that have been overlooked. Among other things, it shows that since the current monetary easing cycle started in late 2011 as Europe hit the wall, only Brazil has cut policy rates by more than Australia.

The statement also devotes more attention to the role of state and federal government policy in slowing the economy. The RBA writes: “Together, the federal and state budget outlooks imply a significant fiscal consolidation over the coming two years. Recent falls in public sector employment suggest that consolidation is having some dampening effect on activity.”

While the federal government's midyear economic and fiscal outlook plays down the impact of its surplus pursuit by including state government deficits this year to come up with a contraction in public sector demand of just half a per cent of GDP, the RBA statement notes: “A range of public estimates suggests that the move from a federal budget deficit to surplus may subtract around ¾–1½ percentage points from growth in real GDP in 2012-13.”

While the states' deficits in total grow this financial year, softening the federal impact, they are scheduled to tighten considerably in the next financial year.

The statement's modelling, with its well-publicised forecasts of a pick-up in inflation (but still within the RBA's target band) and slower growth in 2013, is based on the assumption that the cash rate remains unchanged, while the market is predicting another 50 points of cuts.

The question forecasters working off the RBA document have to ask themselves is whether Martin Place views growth of 2.75 per cent over 2013 as satisfactory. That's no longer “close to trend” or “a little below trend”, it is simply “below trend”.

Those turning negative on the chances of another rate cut must be assuming the RBA wouldn't want its core measure of inflation to go beyond the 2.75 per cent predicted in the statement – and then they have to wonder about the inflationary impact of another trimming when capacity is not a problem.

And what also is missed is that the RBA, unlike the Treasury, isn't afraid of making and publishing assumptions about another factor with important impact on the economy: population growth.

The RBA assumptions include working-age population growth of 1.7 per cent – reflecting the recent increase in net overseas migration.

That population growth means there will be more than monetary policy working to contain inflation – there's room for another trimming yet.

Michael Pascoe is a BusinessDay contributing editor.

30 comments

Correct 1% pa off the standartd variable rate for loans over $500K and 20-25% equity / deposit is the norm and 0.9% pa off for over $300K with same equity / deposit. So 5.70% - 5.60% pa is very common

Commenter

mort

Date and time

November 12, 2012, 12:36PM

Agreed. It is the same as any commercial transaction. If you don't ask for the best deal, it may not be offered. Why has Michael Pascoe taken so long to highlight this well known practice of the big banks?

Commenter

OpenWindow

Date and time

November 12, 2012, 5:09PM

So the banks pass on more rate cuts but only on the small percentage that bargain with them. The rest who don't re-negotiate pay for it. If everyone did bargain for lower rates, I doubt the banks would be so accommodating then as it affected their record profits. The lesson here is that the meek do not inherit the earth, they inherit mortgage debt.

Commenter

Knee Jerk

Location

Sydney

Date and time

November 12, 2012, 12:50PM

This is the same as the telcos. They bank on a vast number of people not realising their contract is up (ie phone handset paid off) and not changing to the equivalent smaller contract without handset payments.

Commenter

Don't get it

Location

Aus

Date and time

November 12, 2012, 3:14PM

It is time for a super bank profit tax - and no, their shareholders don't have the right to rip off the rest of us, put people out of work and firms out of business by excessive charges. The banks offer professional packages (often with the $400+ annual fee and perhaps other charges) with an extra 0.7-0.9% off the 'standard rate' but the fact is that many people already have this and are getting ripped off by not passing on cuts with false claims of extra costs. If this was another industry, similar claims would face proper scrutiny and probably gain fines or jail - why the banks seem exempt is beyond belief. They now have the greatest lending margin ever and this (plus fees) is why they can make record profits even in a bad world economic environment.

Commenter

M

Date and time

November 12, 2012, 4:30PM

I call my bank and told them I had a better quote from a rival bank and they immediately offered to beat it giving me an additional 0.15% off my already discounted rate. They didn't even ask for evidence of the other quote. There is competition in the banking sector but it doesn't come looking for you, you have to go and find it! I am no financial genuis but I can't believe anyone should actually be paying the advertised standard rates.

Commenter

notwaving but drowning

Date and time

November 12, 2012, 12:52PM

Yep done the same thing and got the three year discount rate of 0.31% for another 3 years after the original 3 year discount expired ($190,000 loan). Having said that I only got 0.1% discount from the last 0.25% drop so they are clawing the discount back piece by piece :-)

Commenter

ozcurly1

Date and time

November 12, 2012, 1:31PM

The problem is that people do not wish to step up and take responsibility for their own affairs. They want the government to "take care" of it for them.

Commenter

Michael

Date and time

November 12, 2012, 4:12PM

After the last 0.25% RBA cut I was informed that the CBA was cutting its standard variable rate by 0.2%. However when I checked my statements I saw my rate had only fallen by 0.15%, yet all other previous cuts by the CBA were passed on as promised. I am yet to contact my bank and ask about the discrepancy and I would urge all other customers to do the same.

Commenter

Michael

Location

Adelaide

Date and time

November 12, 2012, 1:17PM

Thats why people should use a mortgage broker. Banks have a legal responsibility to 'make a profit', a broker has the ethical responsibility to 'get you the best deal'. At a bank you are an 'asset' with a number, to a mortgage broker, you are an important client.